RBI proposes new loan rules: What borrowers need to know about EMIs

The proposed framework provides for a one-time exercise to move existing loans linked to internal or external benchmarks to the new framework by April 1, 2029.The RBI's proposal is still at the draft stage and could change after the consultation process.Borrowers with floating-rate loans may get more protection when banks change the benchmark used to set their interest rates. The Reserve Bank of India (RBI) has proposed a new framework that could make such changes more transparent and limit how lenders can alter loan pricing.The RBI has proposed the Reserve Bank of India (Interest Rates on Loans and Advances) Directions, 2026. If finalised, the new rules are proposed to come into effect from April 1, 2027.BORROWER CONSENT MAY BE NEEDED FOR EXISTING LOANSThe proposed framework provides for a one-time exercise to move existing loans linked to internal or external benchmarks to the new framework by April 1, 2029.Borrowers would have to give their consent for this migration. The revised interest rate also cannot be higher than the rate applicable immediately before the loan is moved to the new framework. Banks and other lenders would not be allowed to charge borrowers a fee for the migration.WHAT HAPPENS WHEN THE LOAN BENCHMARK CHANGES?The benchmark is important for a floating-rate loan because the interest rate is generally made up of the benchmark and the lender's spread. If the benchmark changes, it can affect the interest rate, EMI or the time needed to repay the loan. Under the proposed rules, the loan agreement would have to clearly mention the benchmark, how often it will be reset and the reset date.For most floating-rate loans, the benchmark reset frequency would not be more than three months. Once the reset frequency is selected, it generally cannot be changed during the loan period, subject to specified exemptions.BANKS MAY HAVE LESS FLEXIBILITY TO CHANGE THE SPREADThe RBI has also proposed restrictions on changes to the spread charged over the benchmark.The credit-risk premium could be changed only if the borrower's credit profile changes and after a detailed review of the borrower's credit risk.Other parts of the spread, including operating costs, term premium and business strategy premium, generally cannot be changed before three years for a floating-rate loan.Lenders can reduce these components earlier to retain customers, provided the reduction is based on justifiable and non-discriminatory grounds.This means lenders would have less flexibility to frequently change parts of the loan rate even when the benchmark itself remains unchanged.WHAT IF THE BENCHMARK IS DISCONTINUED?The proposed framework also covers situations where the benchmark linked to a loan is discontinued.In such a case, the lender would have to replace the benchmark without putting the borrower at a disadvantage. The loan agreement could also specify a fallback benchmark that would apply if the original benchmark is no longer available.This is important because loans can run for several years, while the benchmark used to price them may eventually be replaced or discontinued.WHAT CHANGES FOR NEW FLOATING-RATE LOANS?The proposed framework would also change how new floating-rate loans are priced.All floating-rate personal loans and floating-rate loans to MSMEs offered by commercial banks would have to be linked to an external benchmark.Other regulated entities, including NBFCs, regional rural banks and cooperative banks, would have the discretion to offer floating-rate loans linked to external benchmarks.The external benchmarks could include the RBI policy repo rate, Government of India Treasury Bill yields, the Secured Overnight Rupee Rate or another interest-rate benchmark published by Financial Benchmarks India Pvt Ltd.Meanwhile, the RBI's proposal is still at the draft stage and could change after the consultation process.For borrowers, this means the proposed protections should not yet be treated as applicable rules. If the framework is finalised in its current form, it could bring greater clarity to how floating-rate loans are priced and how changes to their benchmarks are handled.- EndsPublished By: Jasmine anandPublished On: Aug 17, 2026 11:48 IST